Assume there is a fixed exchange rate between the Canadian and U. S. dollar. The expected return and standard deviation of return on the U. S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U. S. and Canadian stock markets is 1.5%. If you invested 50% of your money in the Canadian stock market and 50% in the U. S. stock market, the expected return on your portfolio would be

The expected return on the portfolio is 15.5%.

= The expected return in the U.S. × Proportion of the investment in the U.S. + The expected return in Canada × Proportion of the investment in Canada

= 0.18  ×  0.50 + 0.13  ×  0.50

= 0.155

= 15.5%

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The expected return on the portfolio is 15.5%.

Explanation:

The expected return on portfolio formula requires multiplying every asset's weight in the portfolio by their respective expected return, then summing up all values together.

Here,

W = weight of the respective asset

R = expected return of the respective asset

It is provided that:

The expected return on the U.S. stock market is 18%.

The expected return on the Canadian  stock market is 13%.

The proportion of money invested in both stock markets is 50%.

Compute the expected return on the portfolio as follows:

Thus, the expected return on the portfolio is 15.5%.

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